The countdown to the cessation of LIBOR is closer than ever with the June 30, 2023 deadline rapidly approaching. As the LIBOR to SOFR transition deadline approaches, it’s important for commercial real estate (CRE) borrowers to prepare for the upcoming changes.
The LIBOR (London Interbank Offered Rate) has been a widely-used benchmark for setting interest rates on loans, including commercial real estate loans. However, it’s being phased out and replaced by SOFR (Secured Overnight Financing Rate) due to concerns over manipulation and lack of liquidity.
Read ahead for five tips on how commercial real estate borrowers can prepare for the LIBOR to SOFR transition in the final months.
1.) Understand the Basics of LIBOR and SOFR
The first step is to understand what the transition entails. LIBOR has long been used as the primary benchmark for short-term interest rates, but its methodology has more recently come under scrutiny. SOFR is a new benchmark that is based on actual transactions in the overnight lending market. SOFR is expected to be more reliable and accurate than LIBOR, but it will require some adjustments to the way interest rates are calculated. Understanding the basics of the transition will help you prepare for any changes that may affect your loan.
2.) Check Your Loan Documents
It’s important to review your loan documents to see if they reference LIBOR. If they do, you will need to make sure that they are updated to reflect the transition to SOFR. This may involve renegotiating the terms of your loan with your lender, so it’s important to be proactive and start the process early.
3.) Understand the Impacts on Your Commercial Real Estate Loan(s)
The transition from LIBOR to SOFR is likely to have an impact on your commercial real estate loan, especially if it is a variable-rate loan. Your interest rate may change as a result of the transition, so it’s important to understand the potential impacts on your payments. You may want to consider talking to your lender to see if there are options for locking in your interest rate to avoid any potential fluctuations.
4.) Stay Informed on the LIBOR to SOFR Transition
The transition to SOFR is a complex process that continues to evolve. It’s important to stay informed about any updates or changes that may affect your loan. You can stay informed by subscribing to industry publications, attending industry events, or speaking with your lender.
5.) Consider Working with a Service Provider
If you’re unsure about how the transition to SOFR will impact your loan, consider working with a servnice provider, like Thirty Capital Financial, that specializes in commercial real estate lending. They can help you navigate the transition and ensure that your loan documents are updated to reflect the new benchmark.
How Thirty Capital Financial Can Help
The transition from LIBOR to SOFR requires commercial real estate borrowers and lenders to have a thorough understanding of the new index and the potential effects the LIBOR discontinuation may have on their loans or interest rate swaps.
To prepare, borrowers should take inventory of their commercial borrowings and determine which loans, if any, have LIBOR-based interest rates. Also, you should begin having conversations with your lender(s) about alternative benchmarks, timelines, and the best path forward.
For additional preparation, you can engage with a debt management services provider, like Thirty Capital Financial, to help you gauge how the transition to SOFR will impact your legacy and future loans and then create and implement a plan to ease the transition.
Download the checklist, Transitioning from LIBOR to SOFR for Commercial Real Estate, for a step-by-step guide to successfully navigate the transition from LIBOR to SOFR.